1. Research & Development Tax Credit Thierry BRETOUT Chairman and Chief Executive Officer tbretout@rbb-paris.com November 16, 2012

2. Agenda 2  R&D tax credit  New 2013 “Innovation” tax credit  Young Innovative Companies status

3. Presentation of the French Research & Development Tax Credit (CIR) (1/8) 3  Tax incentives have become an important instrument for public policies to stimulate business R&D. An increasing number of countries have been implementing such fiscal schemes as part of their innovation policy mix. The French Research Tax Credit (Crédit d’impôt recherche) is general and does not target any specific sector or type of company  Who can benefit from the CIR?  Any industrial, commercial or agricultural organization subject to corporate tax in France  Which expenses are eligible?  Mainly, expenditures relative to human and material resources allocated to R&D, subcontracted R&D, technological watch, patenting or patent protection

4. Presentation of the French Research & Development Tax Credit (CIR) (2/8) 4  How to obtain the tax credit?  The CIR is deducted from the tax to be paid; or else it is refunded at the end of the third year. However, it is immediately paid to young companies under certain conditions. Companies that can neither deduct the tax credit nor obtain a refund can ask banks for loans on the basis of their research tax credit  Computation of the Tax Credit  The CIR is based on the claimed volume of R&D expenditures. It is equal to 30 % of R&D expenditures up to EUR 100 million; beyond this threshold, the rate comes down to 5 %. Until 2012 for the first time, the applicable rate was 50 % the first year, and 40 % the second year. Starting 2013 the only rate is 30%. Other public support to R&D (subsidies, refundable loans…) must be deducted from the base in order to compute the credit  In 2011 total CIR received by companies amounted to 5 billion euros

5. Eligibility Criteria (3/8) 5  The activities considered as the base for calculation of the research tax credit must match the international definition of R&D activities established by the OECD in the Frascati manual  To be eligible the element in question has to demonstrate originality or substantial improvement  Only operations aiming at removing scientific and/or technological uncertainties are taken into account  The issues to be solved must be new and have no known solutions  R&D activities must outrun general practices used in the field of application and must rely on advanced professional skills from scientists and engineers, distinct from the know-how commonly used in profession

6. Expenditures taken into account (4/8) 6  Depreciation allowances  Staff expenses (researchers and technicians allocated to R&D)  Operating costs  R&D subcontracting in France, in other EU and EEA Member States  Fees for patent filing, patent maintenance and plant variety protection certificates  Depreciation allowances of patents or plant variety protection certificates acquired with a view to carry out R&D activities  Expenses incurred for the protection of patents and plant variety protection certificates  Standardization expenses  Technology watch expenses

7. Activities that are not considered as eligible (5/8) 7  Standard engineering activities related products or processes the objective of which is to identify outlets, to improve productivity or profitability, to draw up pre-production plans or to fine-tune the production process.  Engineering projects using existing techniques in order to supply additional information before implementation  After the completion of the experimental phase, the operation of a prototype or a pilot as a normal production unit.  Prototypes validating design, production tests or "experimental production".  Fine-tuning of equipment and tools before mass production.  Study fees to adapt products to style or fashion changes, marketing studies, cost studies.  Adaptation to standards, unless the related work matches the definition of R&D operations.  Studies for the design of a device, a mechanism, even a machine, which lead to the drafting of technical drawings.  Education and vocational training activities.

8. Security of the research tax credit (6/8) 8  Any company may seek an advance approval from the administration about the eligibility of an R&D project, before the work starts  The administration must give an answer within three months; otherwise its agreement is assumed and is enforceable during later controls  The opinion emitted by the public authority is only applicable to the specific research project for which it has been sought. As a consequence, a company may request an advance notice for every project  Companies can ask for a control over the CIR, including for the current accounting period. This procedure is intended to help companies apply the rules properly and secure their tax credit

9. Decision tree (7/8) 9 Criteria to determine whether your expenses are eligible to the CIR YesNo Are your employees engineers ?  Is your project innovative ?  Does your project contain a step of uncertainty regarding its finalization?  Is your project going to improve the state of art?  Is your project an improvement of current technology? 

10. Computation (8/8) 10  Assumptions Salaries and social security contributions for first jobs of Ph. D/doctors: €200,000 Salaries and social security contributions for other research staff: €2,000,000 Subcontracting costs: Within the group: €250,000 Invoiced by public research organizations: €150,000 Depreciation of R&D equipment: €50,000

11. New 2013 “innovation” tax credit 11  Subject to final vote at French Parliament a new “innovation” tax credit will be implemented in 2013 for SMEs:  Employees < 250  Revenues < 50 M€  Balance-sheet total < 43 M€  An “innovation” is a new product, physical or immaterial, which met both cumulative conditions :  It is not available on the market yet;  It distinguishes itself from existing or previous products by superior performances from a technical plan, environmental footprint, ergonomics or features.  Eligible expenses concerns the depreciation allowances of fixed assets, created or acquired which are directly allocated to the conception of prototypes of new products, others than the prototypes of research  Related expenses might also admitted : Staff,patents, drawings and models  Eligible expenses will be capped to 400 K€ at 20% rate

12. Young innovative companies (JEI – Jeunes Entreprises Innovantes) status 12 Who  Headcount < 250  Turnover < €40 million or balance sheet < €27 million  R&D expenditure (eligible to the R&D tax credit) > 15% of the total expenses  Created in the last 8 years (but not resulting from a restructuring, acquisition, reorganization…)  Capital hold at least at 50% by : Individuals Small and medium size business hold at least at 50% by individuals Hedge-funds Public associations or foundations Why  Corporate tax exemption for the first year and tax allowance of 50% the following year (with a de minimis cap of 200 K€ over 3 rolling years)  Social security tax exemption for salaries paid to research staff (100% for 4 years, 80% 5 th year, 70% 6 th year, 60% 7 th year and 50% 8 th year)

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